Seasonality has just flipped on you. Do you know what to expect in the coming weeks? The Fed is giving you the roadmap I’m just here to tell you how to read it.
Let’s take a look at how seasonality is going to line up with the next Fed announcement telling you EXACTLY how you should be trading for the rest of this year.
My Top Stocks Under $10
Look at this, TLRY down 4% yesterday. Take a look at the option activity and youll see the puts outweighing the calls, for the past week we have seen the opposite as the stock teeters back and forth with no commitment to a direction. This tells me there is a shift in sentiment on TLRY as a vote on the cannabis bill starts to slip out of the hand of the market.
What this tells me is there is a bit of an inflated price because of a bit of optimism in the future of cannabis. Anything that delivers a blow to the cannabis movement is going to put a hole in this stocks hull causing it to sink.
Sticking with our cannabis theme for the next stock on our list, LFLY. There was some confusion in the market around this one as 308% of the Call open Interest traded in volume and 188% of the put open interest traded as well.
This stock shot through the roof yesterday from around $5 to nearly $11 before crashing back down to earth. The stock was able to keep some of that momentum landing 15% higher for the day.
We should be watching for a target of 6.50 thanks to the resistance we will see from the 50-daymoving average.
Next on the list is DB we saw option activity go crazy on the call side yesterday with 14% of the open interest traded by volume. The stock was only up about 1%. This is a bit odd of a set up and really it is just the market being in the disbelief stage still and being a bit optimistic without any reason.
With this stock I would set it aside for now until we see some price confirmation from the stock. The situation in the EU isnt getting any better and the Optimism is likely a chance to ride this stock down another leg.
FTCH made the list for the first time in a while, we have traded this stock before it didn’t work in our favor at first but after a huge rally we were able to pull out with a tiny profit.
This stock sitting at $7.50 along with the 20-day and 50-day positions this stock to take a dive to a $6 target price
Why Trade A Stock Under $10?
Most people when they think of the word penny stock, they immediately think The Wolf of Wall Street, Pink Sheets, and the best way to pay somebody to lose your money.
That just simply is not the case.
A penny stock in my mind is any stock under $10.
I know this isnt the traditional definition but I have a good reason for looking at it this way. Really what we are trying to achieve when we trade penny stocks is avoiding the Institutional money.
Institutions are trading in such large accounts that they can move the markets on their own. This effectively lets them control a stock’s price, they can use that to force the common man out of a position by stopping them out. This is a phenomenon that adds a huge amount of risk to the retail investor because it is not something we can see happening until it is done.
Why does this remove the institutional money risk?
I like to think in round numbers. There is a sentiment involved in this paradigm.
If you look at something that is $110 it is seen as something entirely different from something that is $90 even if there is no difference in the actual item. That is because it dropped below $100 so in our minds we ASSUME the $110 item is better because it is more, right?
Not at all. It’s no better, it’s the exact same.
The same goes for stocks, when it drops below $10 institutions typically will not touch it. There is not enough value for them to care. Now remember they are throwing millions into the market at one time, for most of us that is not the case in our personal accounts.
Something special happens below the $10 mark…
Any stock slipping below $10 has a little math problem that works in your favor on these trades.
See a stock that drops from $10 to $9 is a stock that has fallen 10%, but a stock that falls from $9 to $8 has fallen 11.1%. Same $1 drop, but bigger percentage return.
That’s important because a stock that drops from $10 down to $6 has an accelerating return. That works in your favor if you know how to take the trade!
What I look for In a Stock Under $10
Of course when I look for a penny stock, I’m looking for the price first. If I don’t do that then we wouldn’t be just looking at penny stocks. We are looking for inexpensive, not cheap. Cheap has an implied negative connotation that I think holds true. When a stock is cheap it won’t pass my stocks
under $10 litmus test.
After I find the stocks in our price range whats next?
We are looking for companies that are viable, the product or service is clearly defined and scalable (you can produce/deliver considerably more of what you sell than you are now) your market is clearly defined and you have enough customers who want and need your product to enable you to grow. You can make a profit.
If a company is showing any one of these things won’t hold up it is not the company for me.
We only want companies that have good fundamentals you really do not want to throw your money away on a really bad over the counter stock.
Lastly, I look at the volume. How much is the stock traded, how much interest the public has in the given company and if there is enough volume for us to trade options on it for a profit. If we don’t see any volume then it will just move sideways and out money will sit stagnate and yield no profits.
Quantitative Specialist, Penny Hawk
July 28 2022